Winston Wei Dou

Dissecting Bankruptcy Frictions

Joint with Lucian Taylor, Wei Wang, Wenyu Wang

Journal of Financial Economics (2021) Vol. 142, Issue 3, 975-1000

How efficient is corporate bankruptcy in the U.S.? Two frictions, asymmetric information and conflicts of interest among creditors, can cause several inefficiencies: excess liquidation, excess continuation, and excess delay. We find that the bankruptcy process is quite inefficient, mainly due to excess delay. Eliminating information asymmetries would increase average total payouts by 4%, and eliminating conflicts of interest would increase them by 18% more. Without these frictions, 14% more cases would be resolved pre-court, and the remaining court cases would be 73% shorter. With less delay, bankruptcy’s indirect costs would be much lower. In contrast, inefficiencies from excess liquidation and excess continuation are quite small.